Mortgage levy proposal sparks agents' ire

Suggestions that senior Government officials are investigating imposing a mortgage interest levy to dampen the housing market surprised delegates to the national Real Estate Institute conference in Auckland this week.

Bernard Hodgetts, the Reserve Bank's issues and international manager and a former chief economist at ANZ Bank, raised the topic in an address to commercial and industrial agents at SkyCity Convention Centre on Monday.

A Reserve Bank spokesman said yesterday Hodgetts' institute speech was not to be reported but institute officials said it was important to have a public debate about the issue.

The mortgage interest levy, which would charge people to borrow money, was first flagged on February 10 in a report to Reserve Bank Governor Alan Bollard and Treasury Secretary John Whitehead.

But the mortgage levy idea startled real estate officials when it was raised on Monday. They said it was an overreaction, considering the housing market was already stabilising.

Institute president Howard Morley, who today steps down as his term expires, said delegates were surprised. National Party housing spokesman Phil Heatley said it was "staggering" that the levy was being considered.

This year, senior Treasury and Reserve Bank staff flagged the levy suggestion when they reviewed instruments to stabilise the housing market. They said the housing market was more stretched now than it had been been since the early 1970s.

They outlined a number of policy options to supplement the official cash rate in managing inflation. These included permanent changes to the tax system and other regulatory arrangements.

An adjustable mortgage interest levy could be imposed on all housing mortgages to "force a wedge between the price paid for credit by mortgage borrowers and the returns available to the savers financing those loans", the bank said in the report.

The levy could be triggered at times of particular pressure in the housing market and when the gap between New Zealand and foreign interest rates was unusually large.

This was one tool which could be used to provide some cyclical management benefits to ease house price inflation and reduce the need for higher interest rates, potentially reducing upward pressure on the exchange rate, the report said. A limit on loan-to-value ratios was an alternative to mortgage interest levies.

This would apply to all loans for residential property by all lenders and would have a direct impact on the most leveraged portion of the housing market - that with the most debt.

"However, the rules for such a limit would be difficult to define and difficult to enforce," the bank said.

Bollard and Whitehead raised potential problems with the suggestions in a letter to Finance Minister Michael Cullen, saying, "There are no simple or readily implemented options that would provide large payoffs in the near-term".

"It is important to stress that significant house price cycles have been a feature of many - perhaps most - developed market economies in the last decade or so."

The mortgage levy had no international precedent, posed enforcement and implementation challenges and could compromise the Reserve Bank's independence, they said.

CALMING THE BOOM

Treasury and Reserve Bank report suggested:

* Mortgage interest levy to charge people for borrowing money.

* Limit on loan-to-value ratio to cap the amount people could borrow.

* Tightening the tax net on profits made from properties held for short periods.